June 5, 2014 (LBO) - Sri Lanka's state-run power utility has included natural gas in power generation planning studies for the first time, with prospects of gas being found in the country.

In one study scenario where no coal plants after the current ones being planned for Trincomallee, the Ceylon Electricity Board's long term generation plan considered a 250MegaWatt liquefied natural gas plant with a terminal from 2024.

It would be followed by a 250MW plant every year until 2032. The 2013-2032 long term generation plan also included nuclear power for the first time.

The CEB has earlier not used natural gas or imported liquefied natural gas (LNG) as it was considered too expensive compared to its least cost plan with coal.

The simulation found that the present value of the capital cost with no coal after 2019 will be 15.06 billion US dollars compared to the least plan meeting least cost regulations of 13.6 billion in discounted dollars.

LNG is still not in the base case planning scenario.

Special interest groups have been pushing for LNG as a power source in Sri Lanka for several years with high level political pressure but CEB planners had resisted the pressure successfully, instead focusing on getting some cheap coal in to the system as a priority.

Clean Fuel

Though expensive, LNG is a cleaner fuel.

Sri Lanka now has some prospects of generating its own natural gas and the import of liquefied natural gas would not be required.

But if natural gas is sold to the power utility at a subsidized price, it means potential export revenues from direct LNG sales would be lost.

"LNG fuel prices are not economically competitive with the current coal prices," the study said.

But the cost would come down if carbon credits could be sold, which was also considered.

Carbon credit prices however have been coming down from their highs.

Recently due to shale gas and 'fracking' technology in the US, natural gas prices in North America has plummeted, partly helping the US economy recover despite deficit spending and banking restrictions which has delayed a recovery.

Unlike in Europe and other countries where state intervention is entrenched, in the US rulers have not been able to prevent cheap shale gas extraction partly because citizen's property rights are stronger and mineral rights are theirs, economists have pointed out.

China, where environmental concerns are weak, is also expected to move in to shale gas extraction.

The US is expected to become a petroleum exporter soon.

In another development, with the Federal Reserve cutting down its deadly money printing activities (tapering of quantity easing) global energy commodity prices are also easing. Coal prices are also coming down.

In Asia however natural gas prices are still high.

"If the US starts exporting natural gas prices elsewhere may start to fall faster," Tilak Siyambalapitiya, a senior power sector analyst and former generation planner said.

"Today there is much more LNG being transported than 10 or 20 years ago."

Siyambalapitiya says if Sri Lanka generates its own LNG the costs would be more favourable. But with coal prices also coming down, there still be a gap between coal and gas.

"The comparative economics would remain the same," Siyambalapitiya points out.

In Singapore, where almost all power is produced from natural gas electricity is sold at about 27 Sri Lanka rupees (26.66 Singapore dollar cents). Singapore also does not use power prices as a back-door taxation measure to fulfil income re-distribution desires of interventionists.

In Sri Lanka large households now pay close to 60 rupees per unit, perhaps the highest price in the world, in a back-door taxation measure.